NEW YORK (TheStreet) -- In this time of back-to-school and educational renewal, I want to draw upon my experiences as a student, an educator and an industry professional to provide you with some real-world insights to help enhance your financial education.
Whether you're a current business or finance student, starting to think about pursuing a career along those lines or just seeking a few education pointers to help you become a more sophisticated investor, this installment of The Finance Professor has something for everyone.
Staying on Course
There is a tendency to select courses on the basis of the ease of the curriculum or grade-friendliness of the instructor. As a student, this type of strategy tends to benefit you in the short term, but later in life you will regret not having taken certain courses with more valuable, practical content. I always made the decision to take a more challenging course in order to maximize my knowledge, even though it might have come at the expense of my time or potential grade.
So this list of 20 essentials kicks off with a few courses for anyone who wants to develop a well-rounded background and solid foundation in finance and investment:
If you're serious about learning how the financial world works, it is a must to study both microeconomics and macroeconomics. Microeconomics is the study of how individuals and businesses make decisions to allocate resources and buy and sell products and services. This branch of economics explores the supply-and-demand relationship. Macroeconomics is the study of what makes up an entire economy and how the government plays a role in it. Topics that are included in macroeconomics are consumer spending (consumption), investment, government spending, trade balances (imports and exports), employment, inflation and taxes.
In the financial world, if you are quantitative, then the world will be your oyster. However, whether you are mathematically inclined or not, there are two courses which you must complete to ensure that your quantitative skills are up to par: business mathematics and statistics.
Business mathematics, or as we call it at Seton Hall's Stillman School of Business, "Quantitative Methods for Business," is a watered-down version of college-level calculus combined with business mathematics, such as present and future value theories, matrix math and linear programming. Statistics (or as students often refer to it,
) teaches probability and statistical techniques, such as sampling, interval estimation, hypothesis testing and regression analysis.
3. Financial accounting:
In previous articles, I have described the importance of
understanding financial statements and financial reports
. A course in financial accounting teaches the basis behind business accounting, such as double-entry accounting, financial statement analysis and generally accepted accounting principles (GAAP).
If you're a finance major, then at the very minimum you should take two courses: Business/corporate finance (in some schools this is a two-course structure) and investment analysis. Business/corporate finance covers capital budgeting, asset structure, asset pricing, efficient markets hypothesis, financial instruments and the time value of money. Investment analysis will introduce you to the CAPM (capital asset pricing model), financial markets and the investment decision process.
I am going to add one additional course which is an elective at most schools: derivatives. If you have serious thoughts of getting into the financial markets, then a course in derivatives (including options, futures and swaps) is a must. Derivatives encompass the fastest-growing disciplines within sales and trading. Students with a background in derivatives will have more employment opportunities and can expect higher pay in the long run.
5. Instructors matter:
I have seen bad instructors turn good courses into bad experiences, and I have seen good instructors make unbearable subjects palatable.
The key to course selection is to find the best instructor who will likely deliver the best learning experience. How? Speak to other students and to your faculty adviser, and in some instances you might be able to obtain class and instructor ratings.
I have been fortunate to have studied under many learned educators during my life. To this day, I recall their teachings and use them in my daily personal and professional life. When an upperclassman at Wharton, I had the choice of taking corporate finance with Professor Jeremy Siegel (see
"Jeremy Siegel Says Get Ready to Buy") or advanced macroeconomics with a young professor by the name of Robert Shiller (see
"American Dream's Harsh New Reality"). As it turns out, this was a win-win choice, because both of these esteemed academics have contributed extensively to the fields of finance and economics.
At NYU, I took a course on fixed-income and credit markets taught by Professor Edward Altman. To this day, I still use Altman's "Z-Scores" as retrieved off of my Bloomberg terminal before I make an investment decision. (The Z-Score is a formula which attempts to predict the likelihood of bankruptcy by using a weighted average of several balance-sheet variables.)
6. Consider auditing:
Auditing allows you to sit in and participate in a course (at a college or university), but without the possibility of receiving a grade or credit for the experience. As a result, the course fee is often significantly discounted.
When it comes to business and finance, there are three categories of books which are necessary to a read: Textbooks, historical literature and fiction.
The next few items on this checklist of essentials focus on tried-and-true, classic textbooks that have not only survived the years but continue to be updated by active professors and market professionals.
7. Economics by Paul Samuelson:
Samuelson was the second recipient of the Nobel Memorial Prize in Economic Sciences. My father used this book, I used it, and I think that you should use it as well. Samuelson's
(now in its 18th edition) is by far the
standard textbook for introducing students to micro and macroeconomics, as it continues to be (as it has been for several generations) one of the most widely used textbooks on college campuses.
8. Principles of Financial Accounting by Jerry Weygandt, Donald Kieso and Paul Kimmel:
Weygandt, Kieso and Kimmel know how to teach accounting. Their clear and concise approach takes the pain out of the process for those who are not interested in "the numbers." This and other textbooks by this team are widely used in accounting programs as well.
9. Investments by William Sharpe, Gordon Alexander and Jeffrey Bailey:
This text focuses in on securities and securities markets, and it is another classic, which has been in print for decades and is a favorite among university professors.
10. Security Analysis by Benjamin Graham and David Dodd
This is the bible of value investing. Warren Buffett lives by Graham and Dodd, and that should tell you volumes about this book.
11. Options as a Strategic Investment by Lawrence McMillan:
By far, this is the best book on options. I use this in my MBA derivative course. McMillan's book explains everything you ever wanted to know about options in a way that doesn't require you to have a Ph.D. in mathematics. His practical approach to options comes with excellent charts and examples. I have a copy in all of my offices and homes. (I am still searching for the best textbook that encompasses futures, options and swaps.)
12. Stigum's Money Market by Marcia Stigum and Anthony Crescenzi:
Written by the late Marcia Stigum, the latest edition was updated and edited by Anthony Crescenzi, a
"Money Market Magic"). This book is a very comprehensive overview of the banking system, money markets and fixed-income securities.
There are several works of historical literature that have opened up the inner workings of Wall Street to the general public. Gaining insider knowledge of how Wall Street
works will benefit both individual investors and students, especially those students who are looking for internships or post-graduation jobs. I believe the following titles are must-reads, and some are even required reading for my students.
13. Confession of a Street Addict by James Cramer:
If you want to know what it's like to manage money, then read this book. Money managers take various forms: Mutual fund managers, pension and endowment managers, separate account managers (which is my business model) and hedge fund managers. Each of one of these types of money manger has to deal with the intense pressures of performance and beating investor expectations -- achieving certain objectives is critical, and you can learn a lot about how it's done.
14. When Genius Failed by Roger Lowenstein:
This is the story behind the fall of Long Term Capital Management (LTCM). LTCM was a hedge fund that was far too overleveraged and was rescued by Wall Street firms and the Federal Reserve before it nearly took down the entire world's financial system.
15. Blood on the Street by Charles Gasparino:
Find out what went wrong with Wall Street market research during the tech bubble (see
"Investment Research: Ignore the Ratings, Read the Reports").
16. The Predators' Ball by Connie Bruck:
story behind the rise and fall of Drexel Burnham, Michael Milken and the junk bond market in the 1980s. This story will give you an excellent perspective on how mergers and acquisitions (M&A) are financed and the way in which Drexel Burnham went too far in its efforts to control the M&A and junk bond markets.
17. Liar's Poker by Michael Lewis:
This is another inside look at the bond market and working at Salomon Brothers. Many of the LTCM partners and managers (covered in
When Genius Failed
) were also key subjects in this book.
Through the power of entertaining stories, works of "financial fiction" can educate and inspire investors of all ages and experience levels. Here are a few of my favorites:
18. Reminiscences of a Stock Operator by Edwin Lefevre:
This 1923 novel has been read and reread by most Wall Street traders. It tells the trials and tribulations of a "bucket shop" trader by the name of Jesse Livermore.
Bucket shops were trading venues akin to modern-day off-track-betting establishments. Now illegal, bucket shops were once common until the establishment of Regulation T and the various securities laws which now govern the financial markets. There are many lessons to be learned from the trading exploits of Livermore. The central character talks about how he has made and lost fortunes, provides trading advice which is still relevant today and gives insight into risk management and the use of leverage. All of my students have to write a paper which answers this question:
It is often said the more things change, the more they remain the same. How is that so for the stock market?
19. Atlas Shrugged by Ayn Rand:
While I am not a devotee of Ayn Rand's philosophy of objectivism, this book is a very interesting look at how successful entrepreneurs, industrialists and the government interact.
20. Any book by Michael Ridpath:
Ridpath is an author from the U.K. who uses investment banks and financial markets as the backdrop for murder mysteries. This is wonderful entertainment, which also provides excellent insight into the psychology and inner workings of the investment business.